Ag trends: Debt concentration, cycles and new farmers, bankers

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Tue, 2014-02-25 17:42

My last column focused on highlights of the 63rd annual National Agricultural Bankers Conference held in Minneapolis, MN. I presented and moderated several sessions, but also attended other sessions and participated in discussions with the 670 lenders in attendance from 30 states and seven foreign countries. My last column discussed costs exceeding revenues, the importance of working capital as a backup reserve, and the softening of land values. Now, let’s continue to discuss themes from the conference.

Debt Concentration

The debt to asset ratio of the U.S. farm balance sheet is at a record low, causing many to have no concern or worry. However, Dr. Allen Featherstone of Kansas State University presented an interesting perspective. Farm debt is very concentrated amongst larger, growing agricultural operations that are renting and leasing high dollar farm ground. Many lenders are now examining how debt concentration could impact overall portfolio health. Also many lenders will be examining third-party counterparty risk and debt that is interconnected with many parties.

Lenders in 2014 will be conducting much more financial and economic shock testing. For example, they may test a land value decline of 10% to 25%, or up to 40%, which may be required by regulators to ascertain the ability of producers to handle a downturn. More producers’ risk management programs will be scrutinized to determine if a strategy is in place and if it has been executed. At the time of the conference, the feeling was that less than 15% of the crop had been forward priced.

New Bankers and Farmers

Transition management was a theme of the conference. Many sessions focused on building the next generation of bankers with a large amount of pending retirements looming on the horizon. Some bankers are sponsoring special educational programs, giving special rates and offering alternative loan structures as methods to bring in the next generation of producers.

Cycles

The commodity sessions at the conference can be summarized in a nutshell. Grains are in the waning economic cycle while livestock and feathers are on the uptick. Economists suggested a convergence of events will dictate the pace and duration of change.

Overall the theme of the conference was “you can’t dream big enough” based upon a book written by the keynote speaker, Orion Samuelson. His historical perspective indicates American agriculture is in position to weather cycles and continue to be a world leader.